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Do I have enough insurance for my small business?

Published 29 January 2020

Small business owners, are you protecting your own interests? We look why many SMEs fall into the underinsurance trap and what business operators need to be aware of to effectively safeguard their enterprises.

Australians are over-confident about our ability to deal with risks and underinsured compared to other developed countries in the world, according to a report produced by Oxford University in partnership with a major insurer. The real picture is a little more complex, with a number of factors involved.

Underinsurance occurs when business operators don’t adequately cover themselves for an unexpected loss. A simple definition of underinsurance is when your cover provides for less than 90% of the total loss sustained, according to the Australian Securities & Investments Commission. That 10% gap leaves you out of pocket if you have to claim. If a business property is underinsured the gap could be even more than 10%.

With some policies when the insured amount is less than the value of the item the payout is reduced, according to the percentage of underinsurance. Similarly business operators who opt to co-insure can wind up paying the difference between the sum insured and the cost of their losses.



What kinds of businesses risk being underinsured?

Although underinsurance by small businesses is less prevalent than it was 10 years ago, about 10% of the 1000 SMEs sampled across 13 industries by the Insurance Council of Australia (ICA) admitted to being underinsured.

The types of business most likely to be underinsured include

  • education services
  • transport and storage
  • cultural activities
  • communications
  • retail trade
  • accommodation
  • personal and other services.

Statistics suggest about 12% of small businesses are without any insurance protection. The ICA found that the smaller the operation, the less likely they are to have adequate insurance cover, with some enterprises not having any insurance at all. 

Why SMEs fall into the underinsurance trap

With SMEs lodging almost two claims on average per year, ranging from $2,337 to $15,314 in value depending on the industry, why do people expose themselves to this pressure on their resources? Lack of cash flow is a leading cause for business failure and many SMEs rely on their personal assets as security for business loans.

Some of the reasons small businesses give for underinsurance include

  • budgetary considerations
  • feeling that premiums are too expensive
  • the belief that no insurance can ever be enough
  • not understanding the risks involved and the sums they need to be insured for
  • overlooking some of their exposures
  • failure to keep the values cited in the policies up to date
  • being too busy running the business.

Underinsured business operators have to fall back on savings or further borrowing to meet a shortfall in their claim, either from lending institutions or family members.

Identifying your business risks

Awareness of the area of risk is also vital to being adequately covered if, for example, machinery breaks down or you’re forced to temporarily suspend trading. Some SMEs operating from a home office may think their business assets are protected by their home and contents insurance, not realising they need separate cover. The ICA estimates about 10% of businesses don’t have enough cover for their business assets.

Business interruption is one of the most expensive types of claims in value at an average of $20,000, but it’s also a policy that’s often overlooked. It shouldn’t be. Industry findings indicate 80% of businesses that suffer a major loss enter administration within a year.

Many SMEs acknowledge that an insurance claim could potentially cause them to lose revenue, liquidity or put them out of business altogether, but either deliberately gamble on cutting premium costs or simply fail to identify the necessary amounts to insure correctly.

They might enter the value of an asset as the depreciated figure used for accounting, not the actual cost of replacement. Similarly, they might forget to add new assets to their renewal policy or allow for seasonal increases in stock if they’re retailers.

It’s important to correctly asses what your business operation is actually worth. The temptation may be to simply get the minimum insurance required to meet regulatory requirements, or whatever is cheapest and easiest, but by opting for an off-the-shelf package you could end up paying for cover you don’t need and missing out on some that you do.

Avoiding underinsurance

Policy renewal time is a good opportunity to review your business insurance needs. Have you made changes or additions to your business, equipment or premises? Can you calculate the current value of your operation and are you confident you’ve included everything? Will your sums insured cover you for replacements at today’s prices?

More than 70% of SMEs choose to get their insurance through a broker. It makes sense to get input from an expert. If you think you may be underinsured or aren’t sure you have all the cover you need, talking to an insurance broker can help you accurately assess all your exposures. Often a broker can hone in on risks you might not have thought of, such as an Australian Tax Office audit or the full ramifications of rebuilding your premises if they have been destroyed.

We can help

Our Gallagher small business specialists can put together a program of insurance cover for your business that protects you when you need it, at claims time.


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Further reading

5 ways to get a better deal on your business insurance

Business interruption insurance client case study

To the extent that any material in this document may be considered advice, it does not take into account your objectives, needs or financial situation. You should consider whether the advice is appropriate for you and review any relevant Product Disclosure Statement and policy wording before taking out an insurance policy.
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